The single most important condition to create a successful Strategy-Focused Organization is the ownership and active involvement of the executive team. If those at the top are not energetic leaders of the process, change will not take place, strategy will not be implemented, and the opportunity for breakthrough performance will be missed.
Often the change is brought on by poor organizational performance, well below industry norms. For example, several of the CEOs of adopting organizations inherited near- disastrous performance. At Mobil, EVP Bob McCool took over an organization where expenses had doubled, capital employed had doubled, margins had flattened, and volumes were heading down. Clearly, change was necessary. Gerry Isom was hired to turn around the Property and Casualty Division of Cigna at a time when its combined ratio the ratio of expense dollars going out to premium revenues coming in exceeded 130, compared to an industry average of 108. Bill Catucci, the newly-hired CEO of AT&T Canada, noted, "When I arrived, the company was close to bankruptcy. The only core competence we had was losing money. We were good at that, losing $1 million [Canadian] every day."
At other times, the senior executives initiate change projects as part of a new strategic direction for the company. Such organizations adopt new ways of doing business even though they face no obvious crisis. In 1993, Chemical's retail bank was still marginally profitable, but revenue growth in its basic products had slowed. Deposits were leaving the bank for non-banking intermediaries, such as mutual funds and money market funds, leaving fewer funds for the banks to invest, which in turn drove down revenues. Core operating expenses for real estate and personnel were increasing, and new investments were required for expensive new electronic delivery systems. CEO Michael Hegarty also saw electronic banking as an imminent threat to Chemical's historic reliance on brick-and-mortar branches.
Launching major organizational change, however, need not be done just out of fear. Effective leaders can also motivate change by establishing stretch targets to break down organizational complacency and provide inspiration about the future. Pam Syfert, city manager of Charlotte, N. C., drove the development of Balanced Scorecards because she believed they would help the city's departments and employees deliver on the vision to become the number-one city in the U.S. for people to live, work and take their leisure activities. Dudley Nigg, head of the fledgling internet banking division of Wells Fargo, set a goal to become the number-one internet banking company in the world. The Online Financial Services division already enjoyed first-mover advantages and seemed to be doing well. But in the extremely dynamic internet marketplace, Nigg knew that continuous improvement was far from sufficient. He motivated the development of the Balanced Scorecard by setting stret! ch targets: triple the customer base in less than three years; become the first internet bank with 1 million customers; increase the revenue per customer by more than 50%; and reduce the cost per customer served by more than 35%.
Stretch targets break employees out of their complacency that current performance is both good and adequate. The targets should require a total organizational commitment to achieve them.
Building Executive Teams
The dynamics of the executive leadership team frequently determine whether the Balanced Scorecard can be sustained and the strategy successfully executed. The process of building an effective scorecard requires the active engagement of senior executives, not just their support. We refer to this as the "bacon and eggs breakfast" requirement. The chicken made a contribution that supported the meal, but the pig made a real commitment to it. Without stretching the metaphor too far, senior executives need to have some real "skin in the game," investing hours of their time. As senior executives debate and argue among themselves about the objectives and measures on the scorecard and the cause-and-effect linkages on the strategy map, they develop an emotional commitment to the strategy, to the scorecard as a communications device, and to the management processes that build a Strategy- Focused Organization.
Further, many executive teams consist of functional specialists, each with intense specialist knowledge. Such functional executives often have surprisingly little awareness of how other functions work. Organizations must transform their collections of functional specialists into cross-functional, problem-solving teams.
At Mobil Oil, the finance and engineering disciplines had historically dominated the executive team. As the senior managers tried to become consumer-driven and sell products other than petroleum to customers, they had to elevate the role of the marketing executive. Five years after the introduction of a Balanced Scorecard, every executive understood the nuances of the market segments, how Mobil differentiated itself, and the drivers of consumer behavior. The cultural transformation occurred by putting the customer on the agenda, and by getting an intelligent spokesman to help bring the rest of the team along.
The creation of the shared vision and strategy at Mobil was an effective way to build an executive leadership team from the previous collection of individual business unit heads. A tremendous amount of cross-fertilization took place as each element of the strategy was translated to the scorecard format. The strategic issues surrounding customer segments (marketing), yield optimization (manufacturing), cost of capital (finance), and supply chain management (transportation, pipeline) became the shared issues of the executive team. Historically, each of these issues had been considered the domain of a single functional executive.
The creation of an effective leadership team requires the breaking of many traditions. Management-by-silos is deeply entrenched. Catucci at AT&T Canada disbanded his monthly management meetings with individual department heads and replaced them with meetings about the most important business processes, including the management of strategy. Catucci recalled:
"At the Strategic Management meeting, the entire leadership team would get together and talk about the company in its totality: a holistic approach to the business. Instead of the chimneys, we would focus on what was happening throughout the company."
A functional or technical culture is frequently at odds with creating a Strategy-Focused Organization. The U.S. National Reconnaissance Office (NRO) existed for decades as a super-secret spy organization, with three completely isolated and segregated operating programs. Senior executives were engineers with strong records of technical accomplishments. "Soft" managerial tasks, such as strategic planning and implementation, were considered less interesting than solving new technical problems.
In response to a changed external environment, NRO had been reorganized. People from previously highly competitive programs now had to cooperate and agree on a unified approach to space reconnaissance. The new NRO director led a strategy planning exercise, based on the Balanced Scorecard, to actively engage his senior executive team in formulating and modifying the organization's strategy. The Balanced Scorecard provided a common, structured environment and vocabulary for executives and employees to learn how to 'do strategy.' These discussions were the first in which the senior executive team discussed a comprehensive, shared NRO strategy, rather than a strategy for their individual unit.
Perhaps the most critical ingredient for scorecard success is the leadership style of the senior executive. The individuals who led the successful adoption of the Balanced Scorecard felt that their most important challenge was communication. These individuals knew that they could not implement the strategy without gaining the hearts and minds of all their middle managers, technologists, sales force, front-line employees, and back-office staff. The leaders did not know all the steps required to implement the strategy. They had a good vision about what success would look like and the outcomes they were trying to achieve. But they depended on their employees to find innovative ways to accomplish the mission.
At first we were surprised to learn that two of the most successful early adopters, Bob McCool at Mobil and Mike Hegarty at Chemical's retail bank, were ex-Marine officers. The stereotype of military officers is one who succeeds through command and control. But the best military officers, particularly in the Marines, recognize that when the battle is taking place, the generals are far from the front lines. Especially in the uncertain environments where Marine battles occur, whatever has been planned is almost surely not going to occur. Front-line officers may have been killed, equipment may have been dropped off at the wrong location or destroyed before it could be deployed, and the enemy may have appeared in unexpected places. At that point, the mission depends on front-line troops reorganizing and adapting to the local situation. In the heat of battle, the intangible assets the troops can draw upon are, first, a clear knowledge of the mission and objectives ! they are expected to accomplish, and, second, an ability to improvise and work together to achieve the mission and objectives.
Senior Marine officers communicate, educate, and train their troops with a goal "that every private can become a general." Every member of the corps must be able and prepared to lead. McKinsey & Company and the Conference Board performed a study of organizations that were the most successful in engaging the emotional energy of their front-line workers. They looked at many organizations in the private sector, but finally concluded that the Marine Corps "outperformed all other organizations when it came to engaging the hearts and minds of the front line." Given this culture, it is not at all surprising that Marine officers, when leading organizations in the private sector, are constantly looking for ways to communicate mission and objectives, and attempting to inspire their employees to find innovative ways to help the organization succeed.
Bill Catucci of AT&T Canada, in our initial interview with him, described his management style of communication, team building, and empowerment. It sounded very much like what we had heard from McCool and Hegarty. When we asked him whether he had been a military officer, he was initially surprised by our question, but then replied that he had been an Army officer, and concurred that his business leadership style had been influenced by his military officer's background.
The Balanced Scorecard strategic management system works best when used to communicate vision and strategy, not to control the actions of subordinates. This use is paradoxical to those who think that measurement is a control tool, not a communication tool. Excellent leaders recognize that the biggest challenge they face in implementing change and new strategies is getting alignment throughout the organization.
Success in using the Balanced Scorecard to become a Strategy-Focused Organization is most likely when the leader of the organizational unit has a management style that emphasizes vision, communication, participation, and employee initiative and innovation. Avoid organizational units where the leader likes to be completely in control. Avoid leaders who use management control systems to ensure that all sub-units and employees are following directions and adhering to plans determined at the top of the organization. Find the right leader, one who can create the climate for change, the vision for what the change can accomplish, and the governance process that promotes communication, interactive discussions, and learning about the strategy.
Balanced Scorecard Report (Full version) — Balanced Scorecard Collaborative